Monetary Policy

Single Monetary Policy

On 1 January 1999 the Eurosystem, comprising the European Central Bank (ECB) and National Central Banks (NCBs) of the EU Member States which adopted the euro, assumed the task of formulating and implementing the single monetary policy for the euro area.

The objective of the single monetary policy is price stability, which is defined as inflation below but close to 2 per cent - measured according to the Harmonised Index of Consumer Prices (HICP) for the euro area as a whole. Price stability is to be maintained over the medium term. Since the price level cannot be controlled directly, the Eurosystem influences prices through a complex transmission process, which starts with guiding short-term market interest rates through entering into monetary policy operations.

Monetary Policy Strategy

In order to make the appropriate interest-rate decisions to maintain price stability, the ECB, along with all other major central banks, has a clear and coherent conceptual framework for the policy-making process. This is referred to as the monetary-policy strategy.

The ECB’s monetary-policy strategy comprises two main elements: the first is the definition of price stability mentioned above; the second consists of an economic analysis to identify short to medium-term risks to price stability, and a monetary analysis to assess the medium to long-term trends in inflation, in view of the close relationship between money and inflation over extended horizons. This monetary analysis will incorporate developments in a wide range of monetary indicators, including the growth of M3 and its counterparts. Information from both perspectives will allow the Governing Council to assess the risks to price stability and provide the basis for policy decisions.